Accounting Misstatements Following Lawsuits Against Auditors
48 Pages Posted: 18 Sep 2012
Date Written: September 18, 2012
This study investigates whether financial reporting quality is affected by an auditor’s experience of litigation in the recent past. We find that the likelihood of an accounting misstatement and the magnitudes of misstatements are significantly lower for non-Big 4 auditors who recently suffered high litigation compared with non-Big 4 auditors who did not. In addition, we find an improvement in financial reporting quality subsequent to the recent litigation experiences of Big 4 offices. These results are consistent with our prediction that auditors learn from their past experiences of litigation and that this leads to higher financial reporting quality.
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